Case Study: Client Z is a recent prospect from China that has been referred to you by an introducer. Client Z, a successful entrepreneur who made his fortune in China by building a steel business and investing in the properties over two decades ago. His net-worth is estimated to be USD3b, and his main business is listed on the US stock exchange with a market value of USD5bn where he owns roughly 50% of the business. Client Z is dissatisfied with the service and performance of one of his private banks and hence, he is looking for another bank to work with. Client Z has shared his current portfolio and would like your bank to submit a proposal. The client is generally hands on with his investments and does not delegate the operation of the account to professionals. The following are some of the parameters of the proposal that you have obtained through a few meetings: Expected returns: 10-15% per annum. In the client's mind, a 10% pa return with "minimal risk" can easily be attained in onshore China. The client likes to leverage as borrowing cost is cheap given the current low interest rates. Risk appetite: The client believes he is a risk-taker but historically, he has managed to attain high returns without suffering any capital loss. In his mind, it is the duty of the bank to manage the downside risk. Liquidity: The client has no immediate liquidity requirements as his companies are cash-flow positive and he does not anticipate that his personal funds will have to be deployed for business purposes. Time horizon: The client has a time horizon of 2-3 years. As he has three other offshore private banks, he will review the performance from each bank and reallocate funds into the better performing banks. Appendix: Client Z Portfolio with Private Bank ABC ISIN Security Name Notional Mkt Price Cost Current Value XS2189387520 CENCHI 7.65 08/27/23 10,000,000 67 90 6,700,000 XS1982036961 EVERRE 9% 04/11/22 10,000,000 27 85 2,700,000 XS2280833307 COGARD 3.3 01/12/31 20,000,000 86 100 17,200,000 XS1081321595 GRNLGR 5% 07/03/24 20,000,000 84 100 16,800,000 XS1668531335 CKINF 4.85 PERP 50,000,000 100 100 50,000,000 LU0286668453 Fidelity Asia High Yield Fund 1,000,000 17 25 17,000,000 BILI US Bilibili BABA US Alibaba 100,000 55 120 5,500,000 200,000 111 50 22,200,000 AAPL US Apple 100,000 168 120 16,800,000 941 HK China Mobile 500,000 46.7 50 23,350,000 Client Z Founder Shares 10,000,000 10 100,000,000 Sell Put Baidu Strike 150 6 Month 10,000,000 137 Sell Put Airbus Strike 100 6 Month 10,000,000 99 Sell Call Alibaba Strike 130 6 Month 5,000,000 111 Fixed Note Coupon 6-month (AAPL, FB, TSLA) Coupon 20% pa, 87% strike, 100% KO Monthly 10,000,000 98 9,800,000 Loan USD (1-month) COF 1.2% Loan EUR (6-month) COF 0% 20,000,000 50,000,000 ** The fixed coupon note is a structured product that pays the coupon (20% pa) if the worst performing stock trades above the strike at the maturity of the product. A Knock-Out (KO) event means that the note will mature (principal and coupon paid to client) if all the stocks trade above the initial spot level when the note was bought during the end of each month for the duration of the note. The client is open to ideas but highlighted that he is more familiar with Chinese companies. Moreover, he claimed that he has superior insights into some of the businesses as the owners are his personal friends. Moreover, he believes he has a good understanding of local Chinese issues and government policies. The client does not like to diversify citing his investment hero, Warren Buffet, who famously said that diversification is in fact "insurance against ignorance". Although his property exposure is large, he believes that the Chinese government will eventually ease as the property sector is too important to China to "let it go". Part I Please study the client's existing positions, incorporate some of the stated preferences and views and propose a portfolio to the client. While the client has certain views and preferences, it is not always possible to design an investment solution that meet all the requirements. A set of capital market assumptions are included for your reference. You do not need to recommend at the level of individual securities (although you can). There is no "right" answer so long as proper rationale is given in the design of the portfolio. For pertinent information that is not provided in the case, please state your assumptions in your proposal. Hence, please exercise your creativity in dealing with the client needs and at the same time, bring over the business to your bank. Please also state other relevant information which an advisor should ask the client in designing a holistic investment solution. Part II: Other issues to address The Loan-to-value (LTV) is currently at 35% as the current private bank likely deems Client Z's shares as relatively illiquid and according to your estimate, likely to ascribe a low LTV. The client could pledge more shares of his company if the LTV is more attractive, but he would like to withdraw some of the loan proceeds to invest in some private businesses on his own. Client Z would like your advice on his leverage situation and if he should take advantage of the low interest rate environment to double-down on some attractive investments especially on the some of the beaten down Chinese bonds.